1. The Economic and Fiscal Issues Facing Scotland, 2016-2020

2. The Economic & Fiscal Issues Facing Scotland: 2016 - 2020 Prof. Graeme Roy Fraser of Allander Institute

3. Current economic conditions & outlook New fiscal context Two themes

4. Recovery continues………just Source: Scottish Government

5. More challenging year than for rUK Source: Scottish Government & ONS

6. Source : ONS Labour market - mixed signals

7. Source : ONS Source: ONS & FAI Calculations

8. Data suggests 2016 remains challenging but still growth Source: FAI Economic Commentary: March 2016

9. Opportunities & Challenges Immediate‘Longer’ Term Current Outlook – Domestic growth & global growth Participation, wellbeing & economic opportunity – fair work & skills Brexit – implications of ‘yes’ or ‘no’ votesProductivity – innovation, entrepreneurship, skills & education, investment Understanding the changing structure of labour market – participation, skills, age profiles Rebalancing – investment, trade & manufacturing The North Sea – retention/ diversification of skills & investment Global trends – technology, demographics, trade, climate change Fiscal - pressures on public sector spending & new tax/welfare powers Equality – income & regional performance

10. Productivity – some progress

11. Budget & Fiscal Context

12. New Tax Powers

13. Welfare Powers Source: Scottish Government – GERS & FAI Calculations Disability Living Allowance Attendance Allowance Carer’s Allowance Winter Fuel Payment Personal Independence Payment Industrial Injuries Disablement Benefit Severe Disablement Allowance Cold Weather Payment Funeral Payment Sure Start Maternity Grant

14. Scotland’s new Fiscal Landscape OperationalOpportunities & Challenges Block Grant Adjustment – Levels vs. PCID (Review in 2021) Economic Performance – Scotland’s Tax Base & Long-term sustainability Institutional Reform – Fiscal Commission, intergovernmental relations Income Tax – revenue raised & economic impact/efficiency Transparency – Parliament/ independent scrutiny Other Taxes – APD, Stamp Duty, Landfill & links to local taxation Macroeconomic stability – borrowing for forecast errors and shocks Double devolution – Crown Estate & Assigned Income Tax Revenues Administration – Start-up & running costsCapital Investment – prioritisation & repayments Interaction with UK Policy – No DetrimentWelfare & Employability – Investment linked to strategic approach to inclusive growth (existing devolved powers)

15. Significant increase in responsibilities Highly complex framework – limited international precedent Reform to procedures and processes – e.g. timing of Budget Fiscal Commission will play a key role Intergovernmental relations – ‘good & ‘bad times’ Operational issues

16. Assume forecasts are ‘correct’ & no change in policy The Block Grant Adjustment Steps Step 1: Block Grant UK Government Spending Decisions Barnett Comparability Factors Consequentials Step 2: Adjustment for Tax Powers Devolved tax revenues in Scot & UK Implement ‘Comparable Deduction’ – estimates of population growth & tax share Adjust for per-capita indexation Subsequently, additional adjustment to reconcile to outturn population & tax figures

17. Summer/Autumn 2017 – Fiscal Commission Forecast Income Tax Receipts for 18/19 [Tax Data from 15/16] Revenue Borrowing for Asymmetric Shock Forecasting & reconciling revenues – a complex process!! Tax Year 18 – 19 BGA for 18 – 19 Summer/Autumn 2017 Assessment of Economic Performance for 18/19 Spring 2018 – Revisit economy forecast with new data Summer 2020: Outturn Income Tax Receipts for 18/19 known Block Grant Adjusted for outturn data Repay Borrowing Over 5 Years Summer 2017 Spring 2018Spring 2019 Summer 2020………Up to 2023 Revenue Borrowing for Forecast Error – not fully known until Summer 2020 Revised Data both in Scotland & UK Repay Borrowing Over 5 Years

18. Significantly enhanced link between Scotland’s economic performance and budget outcomes Opportunity – on many key indicators Scotland has outperformed the UK since devolution in 1999 Risks – if Scotland grows more slowly, then budget will grow more slowly. Subtle differences in tax base, age profile and structural asymmetric shocks Economic Performance

19. How much flexibility over distinct social & economic model Balance revenue raising & investment in public services with support for growth Coordinated package of tax, welfare and investments in public services Careful consideration of impacts on labour market and business (tax elasticities & economic effects) Policy Opportunities

20. Opportunities & Challenges Immediate‘Longer’ Term Current Outlook - Domestic growth & global growth Participation, wellbeing & economic opportunity – fair work Brexit – implications of ‘yes’ or ‘no’ votesProductivity – innovation, entrepreneurship, investment & work force development Changing structure of the labour market – trends in participation and age profiles Rebalancing – investment, trade & manufacturing The North Sea – retention/ diversification of skills & investment Global trends – technology, demographics, trade, climate change Fiscal - pressures on public sector spending & new tax/welfare powers Equality – income & regional performance

21. Scotland’s new Fiscal Landscape OperationalOpportunities & Challenges Block Grant Adjustment – Levels vs. PCID (Review in 2021) Economic Performance – Scotland’s Tax Base & Long-term sustainability Institutional Reform – Fiscal Commission, intergovernmental relations Income Tax – revenue raised & economic impact/efficiency Transparency – Parliament/ independent scrutiny Other Taxes – APD, Stamp Duty, Landfill & links to local taxation Macroeconomic stability – borrowing for forecast errors and shocks Double devolution – Crown Estate & Assigned Income Tax Revenues Administration – Start-up & running costsCapital Investment – prioritisation & repayments Interaction with UK Policy – No DetrimentWelfare & Employability – Investment linked to strategic approach to inclusive growth (existing devolved powers)

22. The Economic and Fiscal Issues Facing Scotland, 2016-2020